What is a marketplace? Will my online marketplace handle sales tax for me?

The exact definition of a marketplace facilitator, for sales tax purposes, varies from state to state, but all are variations on a theme. According to model legislation created by the National Conference of State Legislatures (NCSL), a marketplace facilitator/marketplace provider is a person who:

• Owns, operates, or otherwise controls a physical or electronic marketplace
• Contracts with marketplace sellers to facilitate the sale of their products or services
• Directly or indirectly (through agreements, contracts, or other arrangements) collects the payment from the purchaser and transmits all or part of the payment to the marketplace seller

Amazon, eBay, Etsy, and a host of other platforms are marketplace facilitators because they fulfill the above criteria. Like eBay and Etsy, a marketplace can operate solely as a platform for third-party sellers. Or, like Amazon and Walmart, it can be both a direct seller and a marketplace.

You’re a marketplace seller if you sell through an online marketplace — even if you also have your own ecommerce store and sell directly to consumers as well. 

Per the NCSL, a marketplace facilitator does not include:

• A platform or forum that exclusively provides advertising services, including listing products for sale, so long as the advertising service platform or forum doesn’t also directly or indirectly engage in the activities listed above
• A person whose principal activity with respect to marketplace sales is to provide payment processing services between two parties

• A derivatives clearing organization, a designated contract market, foreign board of trade or swap execution facility, registered with the Commodity Futures Trading Commission (“CFTC registered platforms”), and any clearing members, futures commission merchants or brokers when using the services of CFTC registered platforms

Thus, Craigslist isn’t a marketplace facilitator because while it provides advertising services and lists products for sale, it doesn’t collect payments from buyers and transmit them to sellers. Facebook operates both a marketplace subject to marketplace facilitator laws and a platform more like Craigslist. In states with a marketplace facilitator law, which is all states with a general sales tax, Facebook collects taxes for purchases made with the shipping and checkout option. However, Facebook doesn’t handle taxes when purchases are made with the local pickup option.

Every state with a general statewide sales tax, plus Alaska, Puerto Rico, and Washington, D.C., has a marketplace facilitator law. There may be slight variations from state to state, but in all states, the “marketplace facilitator” is responsible for collecting and remitting sales and use taxes due on direct and third-party sales if it has nexus with a state. 

There are several ways for a marketplace to establish nexus, including through physical presence, economic activity, or ties to affiliates in the state. It typically doesn’t take long for a marketplace facilitator to hit an economic nexus threshold, which is as low as $100,000 or 200 transactions in many states, so most marketplaces are subject to marketplace facilitator laws.

Some states require marketplace facilitators to report direct sales and marketplace sales on separate returns. In other states, the marketplace must report both direct and third-party sales on the same return. Likewise, some states require marketplace sellers to register and file returns for their marketplace sales, while others do not. Regardless, the marketplace facilitator is generally liable for the applicable sales and use taxes and will be the business that gets audited, in the event of an audit.

Find more details in our state-by-state guide to marketplace facilitator laws and state-by-state registration requirements for marketplace sellers.

As the retailer liable for sales tax, a marketplace facilitator would generally be responsible for validating exempt transactions. That said, while some marketplaces may have a system to collect and store exemption certificates for tax-exempt transactions, others may not. 

The Amazon Tax Exemption Program (ATEP) supports tax-exempt purchases for sales sold by Amazon, its affiliates, and independent third-party sellers that opt to participate in the program. Amazon can also generate transaction-specific exemption certificates that list the actual products ordered, but only if the customer enrolls in the ATEP program in a particular way. ATEP currently doesn’t support partial exemptions.

Amazon advises tax-exempt customers to verify that tax wasn’t collected at checkout. “In some cases,” it explains, “tax may be applied to an order, even if you’re using a tax-exempt account.” This may be because the seller doesn’t participate in Amazon’s tax-exemption program, or because the account doesn’t hold an exemption certificate for a particular state. This list of Amazon’s tax exemption messages gives more examples.

Several other large marketplaces, including Alibaba, eBay and Walmart, have programs for tax-exempt customers. However, smaller or newer marketplaces may not. If you make tax-exempt sales through a marketplace, it’s important to ensure valid exemption certificates are collected, stored, and updated as necessary; if a marketplace isn’t handling sales tax for you, exemption certificate management may fall on you.

An ecommerce platform is a software application that allows sellers and buyers to conduct business over the internet. There are many ecommerce platforms, including BigCommerce, Magento, Shopify, Wix, and WooCommerce. Each ecommerce platform is geared toward a particular audience and tailors its offerings with that audience in mind.

Online marketplaces and ecommerce platforms differ in two key ways:

• Who controls the look, feel, and function of the website
• Who is responsible for sales tax

When you sell through an online marketplace, you don’t control the look, feel, or function of the website. When you sell through an ecommerce platform, you do. 

Marketplace facilitators are generally responsible for collecting and remitting sales tax on behalf of their third-party sellers. Ecommerce platforms usually aren’t required to handle sales tax for businesses, but some can and do manage certain aspects of sales tax compliance automatically or upon request (and for a fee).

Learn more about the similarities and differences between an ecommerce platform and online marketplace in What ecommerce platforms do (and don’t do) for sellers.

Economic nexus laws require a remote seller to register for sales tax once they meet a certain threshold of economic activity in the state. Economic nexus thresholds vary from state to state and range from $100,000 in gross sales in the previous or current calendar year (Arizona) to $500,000 in sales of tangible personal property and more than 100 separate transactions in the state in the immediately preceding four sales tax quarters (New York). You can find threshold details for all states in our state-by-state guide to economic nexus laws.

Some states specifically exclude marketplace sales from an individual seller’s economic nexus threshold. States with this approach include Arkansas, Colorado, and Florida.

But numerous states require individual sellers to count marketplace transactions as well as direct sales when calculating whether the economic nexus threshold has been met. This is the case in Connecticut, Idaho, and New Jersey, for example. 

If you make sales into states where you don’t have a physical presence, either directly or through a marketplace or both, you need to know what’s included in each state’s economic nexus threshold and count all applicable sales. Some states require you to register as soon as you cross the economic nexus threshold, and some states require you to register and file returns even if all your sales in the state are through a registered marketplace. 

It’s a lot to manage.

Check out our Avalara Tax Changes report or on-demand webinar, Understanding sales tax for online marketplaces, to learn more about sales tax obligations for marketplace facilitators and marketplace sellers.